How Minnesota might fare in a second recession

Turmoil in the financial markets and lower-than-expected economic growth have heightened the fears of a second recession.

Regional economists say the probability of another economic downturn is growing, but a lot depends on how businesses and consumers react to the uncertainty in the months ahead.

IMPORTANCE OF HOUSING SECTOR DIMINISHED

One part of the economy that likely would not play a significant role in a second recession is the housing sector, the epicenter of the Great Recession that began in December of 2007. It remains weak from the foreclosure crisis.

Steve Hine, the top labor market analyst at the state Department of Employment and Economic Development, is looking elsewhere. One key is support jobs, because if there are reductions in janitors, tax services or computer systems maintenance that could be a hint that Minnesota's economy is stalling.

Hine also is monitoring temporary jobs, another bellwether of the economy's direction.

"In Minnesota, the employment services sector that is primarily temp help work has been very strong and hasn't shown signs of weakening yet," he said. "But that would be one area where we might expect early indications that things are starting to soften."

Also worth watching are job listings, where the trends also are positive for Minnesota.

Thinking about the economyMPR Photo/Jeffrey Thompson

"If we start to see a decline there, that will indicate that employers are reconsidering their earlier decision to start to hire people," Hine said.

On Wall Street, investors are showing lots of concern about the banking sector, an important segment of Minnesota's economy.

Investors continued to punish banking stocks last Friday, even as the major stock indexes rose. Commercial banks employ about 36,000 people in Minnesota. The concentration of commercial banking jobs in the state's economy is about a third greater than the national average. So, more layoffs in that sector could hit Minnesota hard.

Many banks are still saddled with bad debt from the mortgage crisis, said Scott Anderson, a senior economist for Wells Fargo.

"I think it's going to hold back the banks' ability to grow their loans, and that's a problem for the strength of the recovery because finance is often the lubricant, the oil that helps bolster our growth rate," he said.

ALL EYES ON CONSUMER SPENDING

Anderson also is watching job cuts in the public sector, as state, local and federal government agencies struggle to rein in deficits. But the most important factor in the economy is consumer spending, he said.

"The consumer is the big key here," he said. "If they pull back significantly, we are probably in for another recession."

So far, the signs don't point to that. Last month retail sales in the United States rose a-better-than-expected 0.5 percent, even as consumer confidence declined.

Dan Marshall, co-owner of PeaPods, a toy and baby accessories store in St. Paul, hasn't noticed any measurable decline in sales lately, aside from the usual August slump. But he has noticed that his customers are more cautious.

"People really are more deliberate and they're looking for value," he said.

A big reason for such caution is uncertainty over jobs.

During a recent trip to Micawber's Bookstore in St. Paul, Julie Merriam said she shouldn't be shopping at all because she lost her job in March. But her husband still has his job and their daughter needed books for school. So, she's spending, against her better judgment.

"It's just really hard to tell what's going to happen, if we should be really scared, if we should hold back and hang on to our money and see what happens," said Merriam, 47, of St. Paul. "I think at this point hanging on to our money feels like the right thing to do, to wait it out and see what happens."

Art Rolnick, former senior vice president at the Federal Reserve Bank of Minneapolis, said the main indicators that give him confidence are the record profits enjoyed by large companies and the fact that some employers continue to slowly add jobs.

"It's easy to get caught up in a moment and think things are really looking bad," said Rolnick, a senior fellow at the University of Minnesota. "But they were looking bad in other recessions too and we came out of them and long-term we've done very well."

Rolnick sees huge trade opportunities with India and China. He also said Minnesota's workforce is highly educated and well-positioned to capitalize on the new economy.